The failure to plan for tax prior to a business being formed leads to inevitable tax problems that could so easily have been avoided, have the contractor considered reading widely.
The legal structure for the building business is crucial. Many builders (and other types of businesses) are oblivious of the impact taxes have on the type of legal entity considered. There are three popular types of legal entities. I.e., the close corporation, the PTY (Ltd), or the sole proprietor. More on how taxes affect these entities later.
a) Compulsory Taxes and registrations.
On establishment of the business, there are some compulsory taxes and statutory matters the business will have to register for.
- If a CC, Income Tax. Or the Income tax number of the individual(s), for a sole
proprietorship or partnership.
- Value added tax (VAT), but only if the business generates more than R1million per month turnover (R84 000) per month. Or voluntary registration if a minimum of R50 000 per annum can be proven.
- Whether the business employs people or not, Pay-as-You-Earn (PAYE), tax remains compulsory. So if you the sole owner/director, you remain liable for tax.
- The PAYE returns are submitted monthly, and VAT bi-monthly.
- Register any employees at Department of Labour for Unemployment Insurance.
- And importantly for the building industry, Registration for Occupational injuries (WCA), also remain important.
The tax rate for companies is currently 28% of profits. But SME Contractors can qualify as Small Business Corporations, which entitles them to a reduced rate of 15%!
b) Legal Tax savings
How to maximize taxes.
- Building contractors can use capital allowance on the equipment that they own.
Company A generated a profit of R40 000, and did not use allowances, so it was compelled to pay (R40 000 X 15%)=R6000.00 tax.
Company B, also generated a profit of R40 000, but valued all their assets/tools and arrived at a value of R80 000. The allowance wear and tear is about 25%. Plus they took advantage of s12B allowances, which entitles them to a 50%, write off on equipment. Calculation (R80 000X25%) =R20 000+(R80 000X50%)=R40 000, Total R60 000.
All taxable profits (R40 000-R60 000), were wiped out, and the business owes zero tax!
- Vat input on all equipment purchased once off, is also claimable.
If you cannot be guaranteed regular income, it would be advisable to remain a sole proprietor. There are advantages to this. A company will be taxed separately from its owners. So even if the company benefits from tax savings the owners still have to pay tax. If you a sole proprietor however, you can benefit from tax savings in your business, since these savings will be off set against your personal income.
a) Tax Clearance and compliance certificates.
It is important for contractors that consider doing business with the state, to have a tax clearance. A tax clearance is obtained from SARS, and basically states that your business taxes are up to date.
For workers employed by your business, a certificate from the Department of Labour for Occupational Injuries, also have to be obtained.
In Some cases, businesses also have to be registered at the Building Council.
To comply with all of the above, a proper administration should be in place. Or
the contractor should opt for a skilled accountant or tax practitioner!